A survey of independent contractors shows only 45 per cent plan to stay with their chosen mode of employment after the introduction of the IR35 tax legislation in the UK private sector come April 2021.
The study by IR35 tax advisors Qdos found that with less than six months until the reforms, many contractors, including IT workers, are making alternative arrangements.
Of the 750 contractors questioned about their future after IR35, 18 per cent were considering closing down their businesses as a direct result of the reform, while 17 per cent were considering PAYE employment.
Meanwhile, 6 per cent could retire and 14 per cent have "other" plans, which include starting new businesses or expanding their current one. Of those who expect to stop contracting next year, 75 per cent said this decision was directly related to the introduction of IR35, the survey found. At the same time, three-quarters said they did not have faith their clients would determine their IR35 status accurately.
What is IR35?
IR35 is a tax reform that was unveiled in 1999 by the UK tax authorities. The latest regulation change will force medium and large businesses in the UK to set the tax status of their contractors and freelancers. Previously this was set by the contractors themselves.
Contractors found to be within the scope of the legislation – ie, inside IR35 – will have to pay more tax than they might expect.
The reforms are part of the government's crackdown on so-called disguised employment, where workers behave as employees but avoid paying regular income tax and national income contributions by billing for their services through personal service companies (PSCs), which are taxed at lower corporate rates.
The new rules require assessing whether the contractors meet HMRC's definition of self-employment – criticised by many techie contractors as being variable and difficult to comply with. The controversial Check Employment Status For Tax (CEST) tool provided by the taxman for the purpose has also been criticised by freelancers for giving different results at different times, being susceptible to being "gamed", and for excluding "mutuality of obligation" – the concept that the company is obliged to provide work and the contractor to accept it (which would make them more of an employee).
Critics say that being inside IR35 is essentially "no-rights employment", meaning techies are paid and taxed similarly to regular employees but do not receive any of the security or protections that go along with permanent employment. Contractors within IR35 can be hired and fired at will and without reason.
On the other hand, some have argued, many are using self-employed tax schemes to avoid tax attracted by their hardworking co-workers.
The measure came into effect in the public sector in 2017. The British government hoped the reforms would recoup £440m by bringing 20,000 contractors in line. The implementation in that area has been described as an "utter shambles."
HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimates the reforms will recoup £1.2bn a year by 2023.
In July, MPs voted against an amendment to the Finance Bill which set out to further delay changes to IR35 legislation for off-payroll working, a subject close to the heart of many IT contractors. The government had already said it would delay the introduction of the new rules by a year because of the pandemic.
The IR35 reforms have already discouraged many companies from hiring independent contractors employed via private service companies. Banks including Barclays, Lloyds, HSBC, Deutsche Bank and RBS have all said that they would no longer hire contractors in this way because of the complex assessments to determine whether a contractor falls with IR35 rules - which would create a risk of non-compliance. BAE Systems also applied blanket determinations that put all their contractors inside IR35.
Seb Maley, Qdos CEO, said: "While nearly all contractors want to carry on working via their personal service company when reform arrives, not all independent workers believe they will be able to. This is likely to stem from their experience in the public sector and from blanket and risk-averse decisions already made by private sector firms."
However, thousands of businesses are approaching IR35 reform quietly and pragmatically, ready to compliantly engage contractors outside IR35 when the changes land, he said.
Maley called on any businesses privately planning to ban contractors in response to IR35 reform to think again. While the reforms were short-sighted, they will be manageable, he said.
Andy Chamberlain, director of policy at IPSE (Association of Independent Professionals and the Self-Employed), said the Qdos findings reflected its research from the start of this year, which showed that nearly a third of contractors planned to stop contracting in the UK because of the changes to IR35.
A lack of support during the pandemic has also added to the effect, IPSE added.
"Contractors are the dynamo of the UK economy and, in downturns, would generally be expected to be the driving force of recovery. In the worst recession in memory, however, overall self-employed numbers are declining and an ill-conceived, dangerous government policy is driving thousands of the most highly-skilled out of contracting," Chamberlain said.
He called for a second delay to IR35 to help contractors and businesses cope with the transition as the economy continues to be hit by COVID-19. ®